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Airplanes and Insurance Claims

4 November, 2022

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Airplanes and Insurance Claims

The Effect of the Sanctions on the Aviation Insurance Industry

 

The second half of 2022 has seen a wave of insurance claims by lessors against insurance companies in respect of aircraft seized in Russia following the imposition of sanctions. These claims are being made before both the English and Irish courts. Flynn O’Driscoll has been closely following the developments and the complex legal arguments being put forward by the various parties.

Drawing upon the specialist expertise within our Insurance and Aviation & Asset Finance practices, we are actively involved representing insurers from an Irish legal perspective in connection with a number of claims.

Below we have set out the background as to how these claims have materialised, as well as a brief consideration of a number of claims which are in the public arena.

Background

In February 2022, the EU imposed a suite of sanctions on Russia following its invasion of Ukraine. These sanctions contained a comprehensive ban on goods, services and technologies relating to the aviation and space industry, including technical assistance and related services. In particular, Russian air carriers and aircraft were restricted from flying into, over, or out of EU airspace.  The sanctions imposed on goods, services and technologies linked to aircraft connected with Russia, had a significant impact on the aviation industry, in particular for any lessor with aircraft on Russian soil or under Russian control at the time of implementation of the sanctions. A specific sanction on the supply of insurance and/or reinsurance as well as a ban on the supply of components and associated maintenance services was also implemented.

On 28th of February, further sanctions were implemented, which created a ban on Russian operated aircraft, regardless of their state of registration, from entering or exiting EU territories. This then became a complete ban on all Russian registered, owned, or controlled aircraft, entering EU airspace. The prohibitions did not apply to contracts concluded before 26th  February 2022 or ancillary contracts necessary for the performance of such contracts until 28th  March 2022.

On 28th February 2022, a prohibition on any transactions with the central bank of Russia in Europe was implemented. Further restrictions on 1st and 2nd of March 2022 then prohibited SWIFT messaging services used for the transfer of financial data to seven Russian banks. Overflight prohibitions in the EU came into effect on 9th of March 2022. The export of jet fuel was prohibited on 8th April 2022, pursuant to initial sanctions which were published  in 2014 in connection with Russia’s annexation of Crimea.

The provision of professional services was impacted by restrictions, in particular  in the form of prohibitions on the provision of accounting, auditing, bookkeeping or tax consulting services, as well as business and management consulting or public relations services, architectural and engineering services, advisory services and IT consultancy services to the Government of Russia or legal entities established in Russia. Further restrictions on selling, supplying, transferring, or exporting goods and technology suited for use in aviation or the space industry and jet fuel and fuel additives as listed in Regulation (EU) 833/2014, to any person or entity in Russia or for use in Russia also came into effect.

Five months after the initial invasion of Ukraine, the European Union, and G7 made a united effort to close any loopholes between their respective sets of sanctions. On 21st of July 2022, the acceptance of deposits, including those from legal persons, entities, or bodies, owned by Russian nationals or natural persons residing in Russia, was sanctioned.

On 6th of October 2022, the EU published further sanctions which included increased powers to target legal entities who circumvent EU sanctions, and any persons inside or outside the EU assisting those who circumvent prohibitions. The sanctions also included a prohibition on providing professional services to the government of Russia or legal entities established in Russia, . A ban on the export of “technical items in the aviation sector” was announced in the package as well as an extension of the list of space and aviation products and industries which are restricted.

The effect on the aviation industry has seen the suspension of airworthiness certificates, a prohibition on transfer of maintenance materials, prohibitions on leasing to Russian operators, closure of airspaces to Russian owned, operated or controlled aircraft, and a ban on providing any technical services, to any Russian entities in the EU involved in the aviation sector.

A wave of insurance claims

As a result of the sanctions which have been implemented, hundreds of aircraft owned by western lessors have been effectively seized and re-registered in Russia. Many lessors, following months of discussions and correspondence with their insurers , are now taking steps to formalise legal actions against the insurance companies in respect of claims which have not been accepted by the insurers.

AerCap, the world’s largest aircraft lessor, has filed a USD$3.5 billion suit in the English High Court with insurers, Lloyd’s of London and AIG of the United States in respect of its aircraft seized in Russia. The company’s Russian operators seized 116 aircraft and 23 spare aircraft engines which AerCap have failed to recover following the Russian invasion of Ukraine . Notably, the insurance under AIG is “all-risk” cover for the aircraft insuring against risks with the exclusion of war, whereas the insurance under Lloyd’s covers risks related to war. Both insurers reportedly claimed that the seizure of AerCap’s aircraft did not constitute a loss for insurance purposes.

The case will be closely followed by other leasing companies lodging similar insurance claims. Vitaliy Seveliev, Russia’s transport minister, has stated that 1,140 aircraft have been newly registered in the country, resulting from the decree authorising the seizure of foreign-owned aircraft.

Dubai Aerospace Enterprise (“DAE”), with 19 aircraft in Russia, has filed a lawsuit in London against 11 insurers, including Lloyd’s of London, AIG, Chubb and Swiss Re, two months after it wrote off almost USD$600 million from its balance sheet in respect of the seized aircraft. DAE said it had written off USD$576.5 million for its aircraft and noted that it had “no way to determine whether these aircraft will be returned at any point in the future”. The group stated that they have insurance for the aircraft in question and has filed insurance claims to recover the relevant amounts under the policies.

Furthermore, Carlyle Aviation Partners, one of the world’s largest aircraft leasing operators, filed a USD$700m suit against more than 30 insurers and reinsurers, including AIG, over their 23 aircraft which have been seized. Russian aircraft carriers originally seized over 500 aircraft which were leased from international companies, as of November 2022 it is understood that over 440 of these aircraft remain in Russia and these are worth approximately USD$10 billion. We understand that Carlyle Aviation Partners claim that the insurers have committed nine separate breaches of contract and have not given a reason why they are not paying out. One aircraft, which had been under the operation of Azur Airlines, is currently being held in Egypt, where the authorities have stated that they might release the aircraft to Carlyle Aviation Partners if they agree to pay the airport storage fees.

Aircraft lessor Avolon has commenced proceedings in the Irish High Court against Lloyd’s Insurance Company following the seizure of 10 aircraft in Russia. Avolon ended leases with Russian airlines relating to 14 aircraft to comply with EU sanctions, and was unable to recover 10 of the aircraft. The aircraft have been stranded since February, amounting to a loss of USD$261 million. The company had stated they would make every effort to recover the aircraft, but later claimed that it had valid insurance, which it intended to claim under.

This week, BOC Aviation (Ireland) Limited followed suit and commenced proceedings in the Irish High Court against 16 insurers, including Lloyd’s, Fidelis, and AIG, which will be heard in the Commercial Court in respect of 18 aircraft that were not recovered and remain in Russia following the deadline of 28th of March 2022. In its latest financial statements Avolon wrote off USD$800 million for the loss of these aircraft, resulting in a USD$313 million net loss in June 2022.

These insurance claims are being made as the lessors argue that they have exhausted all other options for the recovery of the aircraft, and have not been compensated for the loss thus far.

Undoubtedly, Ireland will become a central legal “battleground” between insurers and insured lessors in relation to the triggering and provision of indemnity for the seized aircraft. From a legal perspective, technical aviation law and insurance law arguments and positions will be advanced by all parties to the ensuing litigation.

How can Flynn O’Driscoll assist?

Flynn O’Driscoll are uniquely placed to deal with such matters with our recognised award-winning expertise within both our aviation and insurance law teams and are already engaged on a number of such matter with aircraft insurers from an Irish legal perspective.

The firm has established itself as one of Dublin’s leading commercial law firms offering expertise across the full spectrum of legal services. Click here for more details.

Some specific examples of our work in the area of Aviation Disputes include:

  • • Aviation Detention and Repossession
    • Leasing Disputes
    • Freezing Orders
    • Multi Jurisdictional Enforcement Strategies
    • Cape Town Convention Disputes
    • Aviation Specific Insolvency Advice
    • Impact Upon Landing Claims
    • Disputes Regarding 3rd Party Insured Interests
    • Supply Contract Disputes
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Irish Law Firm of the Year 2022

Irish Law Awards Aviation Leasing Legal Team 2021

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Litigation Lawyer of the Year 2021

Please reach out to your usual Flynn O’Driscoll contact or any of the cross-departmental Aviation Disputes team listed below:

Key Contacts

Billy Brick

  • Senior Associate
  • – 
  • E: billybrick@fod.ie 
  • T: +353 1 642 4289
  •  
  • Aviation Law,
  • Employer Liability Defence,
  •  Aviation Disputes

David Curran

  • Partner
  • – 
  • E: davidcurran@fod.ie
    T: +353 1 642 4265
    M: +353 87 646 0981
  •  
  • Dispute Resolution,
    Aviation Insurance Disputes

Eoin Cunneen

  • Partner
  • – 
  • E: eoincunneen@fod.ie
    T: +353 1 642 4287
    M: +353 85 280 2410
  •  
  • Dispute Resolution, 
  • Aviation Disputes, 
  • Insolvency

James Duggan

  • Managing Partner
  • – 
  • E: jamesduggan@fod.ie
    T: +353 1 642 4252
    M: +353 87 650 4255
  •  
  • Asset Finance, Aviation Law, 
  • Commercial Law, Insolvency, 
  • Corporate Restructuring

Stephanie Guidi

  • Solicitor
  • – 
  • E: stephanieguidi@fod.ie
    T: +353 1 693 1790
  •  
  •  
  • Commercial Law, 
  • Asset Finance, 
  • Aviation Law
  •  

Kieran Kelly

  • Partner
  • – 
  • E: kierankelly@fod.ie
    T: +353 1 693 1779
    M: +353 86 260 1943
  •  
  • Dispute Resolution,
  •  Aviation Disputes,
  • Insolvency

Claire McDermott

  • Partner
  • – 
  • E: clairemcdermott@fod.ie
    T: +353 1 642 4259
  •  
  • Aviation Law, 
  • Employer Liability Defence, 
  • Aviation Disputes

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